Mighty Casey’s General Stores Strikes Out

Ever heard of Casey’s General Store (NASDAQ:CASY[1])? Or better yet, ever been to one?

Personally, I’ve been around 7-Eleven and Circle K shops all my life, but I’ve never once even seen a Casey’s … and that’s part of the reason I’m a fan of the stock.

See, I really like regional companies that play in a specific niche. It means that many investors (yes, like me) may not have heard of them, unlike big names in many major metropolitan areas. Still, Casey’s has been around for 54 years and has an amazing 1,700 store base in just 14 mid-western states. That’s solid.

Plus, Casey’s is unique in that it’s bit of a cross between a convenience store, Denny’s and Papa John’s (NASDAQ:PAPA[2]). The stores make pizza, made-to-order subs, baked goods, breakfast, beverages, lunch and dinner, along with all the convenience store staples. Naturally, you’ll find gasoline outside the stores as well.

Last but not least, Casey’s also does something else different: Its websites features company autos, land and property that it would like to sell. Name one other company that does this. Personally, I love it. It’s very neighborly … as it should be, since 59% of all of stores are located in areas with populations of fewer than 5,000 persons, while only 16% of stores are located in communities with populations exceeding 20,000 persons.

Unfortunately, the list of things to like about the general store ends there. Because, alas, the payroll tax increase, gas prices and general state of the economy are all teaming up and weighing on the company.

In its third-quarter earnings report, the company did increase revenue … but it still missed estimates and whiffed on earnings. Specifically, Casey’s generated revenue of $1.66 billion vs. expectations $1.72 billion estimate. That’s a meager 5% increase. Earnings per share came in at 42 cents — substantially below the expectation of 48 cents. Worse, that represented a 7% decline over the prior year.

Of course, growing sales and sliding income usually means one thing: Slipping margins. While gross margin did pop up 50 basis points to 15%, operating margin was a tiny 1.9% — 30 basis points worse than last year. Then we get to that all-important net margin number — a meager 0.9% and 20 basis points lower. This kind of business runs thin margins anyway, so when it falls by 20 basis points, that’s not good.

Add it all up: Revenue only ticked up a little bit, expenses went up and the economy is not being friendly. All in all, it sure ain’t pretty.

This is especially worrisome to me because convenience stores like Casey’s are halfway between consumer staples and consumer discretionary. Heck, they’re called “convenience” stores for a reason. They make it easy to grab some food on the run, to grab the odd item you need or to fill up your gas tank. When economic times are even decent, people have no problem engaging in this behavior.

However, when economic times are flat-out bad, people think twice about making these kinds of purchases. They think, “I’ll just stop by Dollar Tree (NASDAQ:DLTR[3]) on the way home instead to save money.” Or they decide “I won’t have that slice of pizza now, I’ll just eat something at home.”

Consumer behavior is very sensitive. When you have 2% less in your paycheck because of the payroll tax hike, or you’re paying over four bucks a gallon at the gas pump, places like Casey’s take it on the chin.

In the end, Casey’s struggles speak poorly to our country’s economic state. As a result, I would be very cautious investing in consumer discretionary at this time and be especially wary of high-end retail.

Times may only get worse.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.